Dollar weakens, yen hits 2024 highs on bets of sharp Fed rate cut

The dollar weakened on Friday and the yen hit its highest level of the year as investors remained on tenterhooks ahead of next week’s central bank bonanza, with the focus on the Federal Reserve and the size of its expected interest rate cut.

While the Federal Reserve is almost certain to cut rates next week, uncertainty over whether it will cut by 25 basis points or 50 basis points (bps) has kept investors on edge and weighed on the dollar.

Analysts pointed to news reports in the Financial Times and the Wall Street Journal that the Fed’s decision would be very close as one reason traders raised bets on a big rate cut next week.

Higher U.S. jobless claims data on Thursday and a Wall Street Journal article on the Federal Reserve’s rate-cut dilemma revived bets on a massive cut at the September meeting, according to Christopher Wong, a currency strategist at OCBC.

Traders are currently pricing in a 45 percent chance of the Fed cutting rates by 50 basis points, the CME FedWatch tool showed, after rising steadily over the past two days. Markets are pricing in 116 basis points of easing from the three remaining meetings this year.

Former New York Federal Reserve President Bill Dudley said on Friday there was a strong case for a 50 basis point cut.

He said rates are currently 150 to 200 basis points above the so-called neutral rate for the U.S. economy, where policy is neither restrictive nor expansionary. “So the question is, ‘Why don’t they just get started?'”

The European Central Bank cut rates on Thursday but ECB President Christine Lagarde lowered expectations for another cut next month, sending the euro higher, and the single currency held on to those gains in early trading on Friday.

In addition to the Federal Reserve, the Bank of England and the Bank of Japan will hold monetary policy meetings next week.

The euro rose 0.11 percent to $1.10863, after rising 0.57 percent on Thursday, leaving the dollar index, which measures the U.S. currency against six rivals including the euro, at its lowest level in a week at 101.05.

A series of mixed U.S. economic reports this week have clouded rate expectations; one report on Thursday suggested layoffs remained low even as the labor market was slowing, while other data showed producer prices rose slightly more than expected in August amid a spike in the cost of services.

Xiao Cui, senior U.S. economist at Pictet Wealth Management, sees no signs of a sharp rise in layoffs or a slowdown in hiring that would require an aggressive policy response.

“Barring a significant financial shock, we maintain our view of a monetary policy normalisation cycle starting with 25 basis point cuts in September, November and December of this year.

But Cui said the risks of more intense easing at the outset — meaning cuts in larger increments and a quicker return to neutrality — are rising. “If evidence emerges of weaker labor demand or rising layoffs, the FOMC will react strongly,” referring to the Federal Open Market Committee.

Shifting rate expectations sent Treasury yields lower in Asian hours on Friday. The benchmark 10-year U.S. Treasury note yield fell 3.6 basis points to 3.644 percent.

The yen hit its highest level since Dec. 28 at 140.645 per dollar ahead of a Bank of Japan meeting, where the central bank is likely to hold rates steady. The yen rose 0.6 percent to 140.965 and is seen gaining 1 percent this week.

BOJ board member Naoki Tamura said on Thursday the central bank should raise rates to at least 1 percent as early as the second half of the next fiscal year, but added that it would likely increase rates slowly and in stages.

Sterling rose 0.19 percent to $1.3150 ahead of next week’s BoE meeting, where markets anticipate the central bank will hold rates after a 25 basis point rate cut in August.

Source link